Local government minister John Healey has blurted out the ideology of our rulers. Councils, he says:

are in a different position from individual savers. They are intelligent, they’re well-informed investors…

This is not just false. It is the precise reversal of the truth.

The fact is that it is individual savers, on average, who are intelligent and well-informed, whilst it is the professionals who get it wrong.

It is not ordinary individual investors who caused the present crisis and need a multi-billion pound bail out.

And there’s quite a bit of academic research from around the world showing that individuals out-perform professional investors. Here’s Granit San:

We find a significant difference in the return patterns of stocks with different levels of trading activity by institutions and individuals. These differences indicate that institutions buy high and sell low. Our results show that the inferior performance of institutions relative to individuals is not due to trading in stocks with low risks. On the contrary, institutional performance declines both, when the performance is adjusted to risks, and when institutions take higher risks.

Here’s Ron Kaniel and colleagues (pdf):

We document positive excess returns in the month following intense buying by individuals and negative excess returns after individuals sell.

That evidence comes from the US. Here’s some from Norway:

Using unique data on month-end stock market portfolios of all individual investors over an eleven year period, we find that a substantial number of investors exhibit economically and statistically significant performance persistence.

And here’s evidence from Australia which shows that ordinary retail investors are not responsible for share price bubbles:

We conclude that individual investors, the category commonly assumed to be susceptible to cognitive errors in trading decisions, are not responsible for stock mispricings.

I don’t know of comparable robust evidence from the UK. But I have shown for years that almost all unit trust managers under-perform no-brain strategies, suggesting retail investors have little to beat. And having met a fair number of fund managers and retail investors, I know which group I’d back in an IQ contest. Remember – the vast majority of individuals avoided reckless investments in over-priced buy-to-let schemes; the same cannot be said of banks.

Healey’s implication that individual savers are not intelligent or well-informed is, therefore, not based in the evidence.

It is, however, based in the ideology that underpins not just New Labour, but our entire political and boss class – the presumption that ordinary individuals are hapless saps who need rules and orders from well-informed experts to protect them from their own folly.

But one lesson of the financial crisis is that this is plain false. What ordinary individuals need protecting from is not their own folly, but the reckless stupidity of spurious experts, be it in town halls or bank boardrooms.

Our political class, however, will never see this. As Upton Sinclair said: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

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   [...] Chris Dillow: Healey’s implication that individual savers are not intelligent or well-informed is, therefore, not based in the evidence. [...]